Japan's credit rating cut to AA- by S&P on debt load

Japan’s credit rating was cut for the first time in nine years by Standard & Poor’s (S&P) as persistent deflation and political gridlock undermine efforts to reduce a ¥943 trillion ($11 trillion) debt burden.

The world’s most indebted nation is now ranked at AA-, the fourth-highest level, putting the country on a par with China, which likely passed Japan last year to become the second-largest economy. The government lacks a “coherent strategy” to address the nation’s debt, the rating company said in a statement. The outlook for the rating is stable, S&P said.

The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt is about twice the size of gross domestic product. Vice Finance Minister Fumihiko Igarashi this week said the government must fix its finances to avoid a debt crisis that could trigger a “global depression”.

“I hope this serves as a warning for the government, they have absolutely no sense of crisis,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Once bond yields spike and the fire is lit, the amount needed to finance Japan’s borrowing needs is going to jump and it’s going to be too late.”

The cost of protection against a default by the Japanese government rose. Credit-default swaps jumped 4 basis points to 84 basis points, according to Deutsche Bank, set for the biggest daily increase since November 30, prices from data provider CMA show.

Thirteen Japanese companies included in the benchmark Topix stock index are more highly rated than AA- by S&P, including Toyota Motor Co. An S&P spokeswoman declined to say whether company-rating downgrades will follow. Shiori Hashimoto, a spokeswoman for Toyota City, Japan-based Toyota, declined to comment.

Yen weakens after rating cut

The yen weakened and stocks swung between gains and losses after Standard & Poor’s downgraded Japan’s debt. The yen weakened against its main counterparts at 6.50 am in New York.

The yen depreciated 0.9 per cent against the dollar, after sliding as much as 1.3 per cent, and declined 1.1 per cent versus the euro.

Japan’s credit rating was cut by one step to AA- on concern Prime Minister Naoto Kan hasn’t done enough to curb the world’s largest debt load, S&P said.

“The downgrade does matter because it reflects the ongoing decline of sovereign creditworthiness across the globe,” Kit Juckes, London-based head of foreign-exchange research at Societe Generale, said in an e-mail.